Global index compiler FTSE dashed hopes on Thursday that South Korea and Taiwan would be upgraded to advanced market status, saying more work was needed in areas such as off-exchange transactions.
Among other markets, FTSE said Pakistan will be removed from its Global Equity Index Series from June 2008, after it failed to meet entry requirements, while Israel will be promoted to developed status, also from June next year.
Hungary and Poland will be lifted to advanced emerging status from the middle of next year and Greece will remain on watch to be demoted to advanced emerging status from developed status, due to restrictions to international investors.
South Korea and Taiwan, however, will stay on the watch list to be upgraded.
"Markets on the watch list have made very significant changes to their regulations and investment procedures and systems to assist international investors to invest in their markets and are to be congratulated on the progress made," said Mark Makepeace, FTSE chief executive.
"I hope that these markets will remain engaged in this process and that further markets that are close to achieving developed status achieve this goal at the next annual review in September 2008," he said in a statement.
FTSE also said China's mainland A shares will remain on the watch list for possible inclusion in its Global Equity Index Series.
FTSE said South Korea still needed to work on removing restrictions on the free delivery of securities between accounts and in the foreign exchange market as well as easing off-exchange transactions.
Makepeace said freer access for foreign investors to South Korean markets would be a key criteria for its decision to upgrade. "It needs to meet all the criteria for international investors to access the market for a year," he told a media briefing.
For Taiwan, the index compiler said a free and well developed forex market, a liquid stock lending market as well as improving the process of transferring securities between accounts and off-exchange transactions were still needed.
The news weighed on South Korean stocks, keeping the main KOSPI flat. Taiwan's main TAIEX Index rose 1% in the first 10 minutes of trade.
"The FTSE decision was very disappointing. Foreign investors who bought massive futures recently are expected to unload those positions today, which will affect other investors," said Choo Hee-Yeop, deputy general manager of asset management strategy at Korea Investment and Securities.
An upgrade could have attracted more foreign flows from funds benchmarked to the FTSE indexes, with Goodmorning Shinhan Securities recently estimating foreign net inflows could total some 10-15 trillion won ($10.80 billion) as a result.
Eric Tu, chairman of Grand Cathay Investment Service in Taiwan said he did not expect any negative reaction from Taiwanese stocks.
"The market's focus will be on corporate fundamentals in the fourth quarter and we also will be watching if there are any major government measures to boost sentiment before the presidential election next year."
The action came after both centers were placed on a watch list for a possible upgrade in 2004, but failed to earn the long-sought designation in each of the previous two years.
More importantly, the FTSE action was seen likely to raise expectations that larger index compiler MSCI Barra will follow suit at its review announcement in May.
About $3 trillion in assets are estimated to be linked to MSCI indexes compared to $2.5 trillion for FTSE.